Sergiy Tsivkach: “Investors Have Not Lost Interest in Ukraine During the Pandemic”

Ukraine got with the coronavirus crisis new chances: foreign companies, particularly European ones, are disappointed in some manufacturers and look for new partners in proximity, says Sergiy Tsivkach, Executive Director of the Ukrainian Government’s investment promotion office UkraineInvest. In an interview with Natalia Richardson for Brussels Ukraїna Review, he said that now Ukraine has another possibility to prove itself as an attractive country for investment. According to him, there are many changes for the better, but many problems remain to be solved.

Experts say about a cold investment climate in Ukraine. Do you think that it became a bit warmer recently?

We have a lot of positive changes in regulatory reform, Ukraine has improved its position in the Ease of Doing Business index. Denys Shmyhal’s government continues to working in this direction.

The investment climate improved in 2020 through many changes and reforms. These include deregulation and simplification of business conditions, reform of the agricultural land turnover system, launch of a competitive gas market model (reorganisation of Naftogaz, national oil and gas company of Ukraine), reform of the inland water transport system, completion of the main decentralisation phase, launch of urban development reform, liberalisation of the alcohol market and export, creation of the electronic portal Diia (Action) and large-scale digitalisation of administrative services, and creation of the National Intellectual Property Authority.

At the same time, it is necessary to understand the challenges faced not only by Ukraine but also by the whole world in 2020. So the growth may not have been as rapid as Ukraine needs. Butinvestors have not lost interest in Ukraine due to the crisis. On the contrary, we see a lot of enquiries from companies that, as a result of a global, regional or national crisis during the pandemic, are starting to look at Ukraine as a promising country.

Mr. Tsivkach, how has COVID-19 changed these enquiries? Maybe new areas of cooperation have emerged? Or have the old ones disappeared?

Yes we saw some changes. For example, recently there are many requests for protective products – I mean, for the relocation of companies in this field. Statistics shows that one in five deliveries of gowns, masks and other protective products to developed countries in Europe during the pandemic was not made on time. These goods were produced in certain Asian and other countries. They did not expect demand to rise by as much and thus were unable to supply, but they processed all the orders that came to them. Now some countries are thinking about how to diversify production by locating it in different regions or parts of the world.

They are not planning to withdraw from those countries that have not delivered, but they want to have alternative contracts with other states, particularly in Europe.Just to be more secure in case of nextwaves of pandemic or economic crisis worsening.

We also see a growing interest in Ukraine in concessions, public-private partnerships. The new concessions law of 2019 contributes to this. Last year the largest concession in the history of Ukraine’s independence took place – the signing of the contract for the transfer ofPort Olvia in Mykolaiv  to the Qatari group QTerminals for management.  The amount of the deal is $127m of investments. Also 80m hryvnias will be invested in infrastructure development.We see great investor interest in Ukrainian privatisation objects. In particular, the privatisation of the alcohol industry has been active.

A Moldovan company bought one plant of Ukrspirt for 120 mln hryvnia. Thus, we see that a foreign investor comes to Ukraine. State Property Fund of Ukraine is preparing many more objects for privatization, also in this field. This is an effective way to attract investment. We work very fruitfully with the fund and always promote companies that are ready for privatization.

However, we need tobe proactive. We cannot be just satisfied with the fact that investors are paying to us more attention than earlier due to the crisis events in the world. Let us be frank: they are looking not only at us. They are also looking at other countries and beginning to change the paradigm of thinking about traditional investment partners. That’s why they are looking at various options. We need to be productive here to ensure the development of investment policies, legislation, investment incentives.

We should ensure more comfortable conditions for investments of companies in Ukraine, both Ukrainian and foreign ones. After all, we do not need to make advantages for foreign investors, but we need to ensure equal conditions for doing business for all entrepreneurs in Ukraine. It will stimulate both domestic and foreign investment markets. International organisations estimate that  about170 countries in the world will have a drop in  their gross domestic product. So you have to understand that all these countries will change, put forward new proposals and think about how to attract investors more effectively.

Among such initiatives in Ukraine, one can mention, firstly, the recent Presidential Law on incentives for significant investments. We are talking here about investments of over 20 mln  euros to be realised within 5 years in Ukraine, which will create at least 80 jobs. In this case, companies can receive the state aid – up to 30 per cent of the investment amount. This aid includes exemption from certain taxes and import duties on new equipment required for the implementation of the investment project, provision of land plots in state or municipal ownership for use on preferential terms, construction of necessary infrastructure at the expense of state and local budgets, assistance in connecting to heat, gas, water and electricity supply networks, engineering utilities. All this will be set out in a contract to be signed by the investor and the Ukrainian government.

The Verkhovna Rada passed this law on 17 December 2020, and it is now awaiting the President’s signature. To implement the law, the Ukrainian Cabinet of Ministers will need to adopt a number of regulations: on the requirements for a feasibility study for an investment project and a methodology for calculating the amount of state support for the implementation of investment projects. State support for investment projects with considerable investments will help attract strategic investors, enhance Ukraine’s investment appeal, and boost the competitiveness of the Ukrainian economy.

Do you think that Ukraine has  transparent conditions of doing business with the state?

The new law stipulates that these conditions for cooperation between the state and a private investor will be spelled out in a separate agreement to be signed with the government of Ukraine. This is a big advantage for investors and quite a significant incentive for them to think of Ukraine as a long-term reliable partner.

We should take care of the development of  regions, taking into account their specificities and competitive advantages. We should develop innovations, support research centres and all projects that will ensure our growth in the future. After all, if we draw classical formulas to catch up with our neighbours, it might take us 30-40 years. We need to think in advance. It is  clear that companies with innovations and digitalization approaches are better off. The Ministry of DigitalTransformation has developed a lot of such initiatives. You can now register a company very quickly and obtain a license. Much less papers are needed – thanks to the “Diia” (Action) public services app. The government is also preparing a reform called «Diia City» (Action City). It envisages the creation of a virtual free economic zone for IT companies.

In other words, these companies will be able to do business in Ukraine with lower taxes, under simplified procedures. It will also attract attention to our country. We have to present Ukraine as an attractive country for the relocation of production companies in different fields, includingagro-processing, light industry, technology enterprises, etc. At the same time, we need to think about companies which create high added value. The key priority, of course, is agro-processing. Our country has sufficient agricultural raw materials. Nevertheless, the amount of finished goods produced in our country is insufficient. Every year Ukraine imports finished agricultural products worth several billionUSD. By analyzing specific indicators, we have seen that Ukraine can ensure – in the near future – the establishment of agro-processing enterprises on its territory for a total amount of about 700-800 million USD.

Also in other sectors of the economy, import substitution can attract investors when they think about a country. When setting up their enterprises or investing in some financial structures, investors always look: where is the sales market? who will buy this product? the local market or the neighbours? are we talking about global markets? We can influence global markets indirectly, only through certain trends. But there is a local market, and we need to increase demand there.

If we take Ukrainian raw materials, manufacture them in a neighbouring country and then import them as baby food or semi-finished products, the added value by 80-90% remains in the neighbouring country. But jobs are not being created here, and taxes are not being paid, at the same time Ukraine has problems with fixing its roads, hospitals, etc. We are thinking about this too, and we are developing programs of industrial relocation and industrial outsourcing.  The concept of such a programme has already been developed and we hope to present it by mid-February. Afterwards, we will organise a large-scale campaign to find investors. We need to talk about concrete projects that can be implemented today, showing how and where a domestic or foreign investor can earn money while creating jobs and paying taxes in Ukraine. And most importantly, developing Ukraine’s international image.

Every investor who comes to Ukraine and has good profits will bring at least 3-5 more investors. They share information with each other. But an investor who comes out of Ukraine with a negative message will push probably 10-20 investors away from Ukraine, if not more. Negative news spreads much faster than a positive one. And we need to change this paradigm.

Has the bureaucracy been reduced? When it comes to the paperwork for investment, for starting projects with investments? Has the procedure for foreign investors become easier recently?

The system of starting a business itself is more simplified, and it works. Opening a business is not a problem in Ukraine. Problems sometimes arise with getting a permit for some or other activities. It’s a question of building a facility or getting some specific – for example, mining – license. There might be a grey area or misunderstanding between the parties. We have seen such problems, in particular with regions. I am not just referring to corruption. Yes, someone somewhere at the regional level might have a desire to influence the process with some advantages for himself. By the way, lately we don’t hear about this very often. Local authorities need to create more comfortable conditions for investors, this will help to attract more investments in their regions. They need to develop and understand that an investor comes to them not to ask for something, but to give – in the form of investments, jobs, and taxes to be paid in their region.

UkraineInvest deals precisely with these issues. Foreign investors come to us, and we have a separate division that works with legal issues and regulatory policy. If necessary, we help them solve problems by contacting the relevant state authorities. We also cooperate with law enforcement agencies if investors have problems in this area. Over the past 3 months, we have managed to attract, unblock 275 mln USD worth of investments in Ukraine. This is our daily work. Also, by the end of this year Ukraine plans to introduce the digitalisation of the country, which will significantly reduce bureaucratic and corruption risks.

Recently there has been a problem with foreign investors in renewable energy, to whom Ukraine owes a debt. How is Kyiv going to resolve this issue?

This is a very significant issue.  There has been some arrears since the tariff changes, but the government is actively working on this issue..We have also been engaging in the process and looking at how financial instruments can be used to find a solution. Now several options are being considered. We hope that the problem will be solved soon.

You said that regional development is extremely important for the Ukrainian economy. What about investments in Ukraine’s coal-mining regions? How is the reformatting of these towns going, are foreign investors showing their interest? There is information that Germany wants to invest in such projects.

Yes, this process is called “Just Transition of Coal Regions”. We are working with the Ministry of Energy on this issue.

Ukraine and Germany have launched a new energy partnership in 5 areas (energy efficiency, decarbonisation, renewable energy, hydrogen energy, transformation of coal regions).

There are already agreements on 4 pilot projects for the transformation of coal regions, where coal mines will be physically closed.The first mines to be closed will be Velikomostivska (Lviv Oblast) and 5/6 (Myrnohrad in Donetsk Oblast), and their territories will be transformed into tourism and technology clusters. There is also an initiative to create a multi-partner fund to coordinate and mobilise international financial and technical assistance for pilot projects to transform coal regions and mines’ closure.

We are getting involved in creating an ideology, an environment for the development of entrepreneurship, for attracting investment in towns where mines will be shut. The manufacturing relocation programme will include a unit on the just transition of coal regions. This process is not easy. You have to understand that miners are a labour caste that will only work in certain industries. You cannot drastically change qualifications from working in a mine to, for example, picking vegetables or fruit, or the restaurant business. It is impossible. These people have worked in mines, which deserves respect. Our office, together with the government, should provide them with nice and decent job offers.

Are there any new investments in Ukraine’s airports, including regional ones?

Yes, there are. For example, a tender has already been announced for the construction of a runway at Zakarpattia airport, and funds have been allocated for a feasibility study. UkraineInvest was approached by investors who were interested in participating in this project, namely in building the airport’s infrastructure. Now the Ministry of Infrastructure and the Ministry of Economy are working on a list of facilities that should be the first to enter the public-private partnership system.

Thus, work is undoubtedly underway. We recently had a meeting with the Agency for Public-Private Partnerships in the framework of the Ministry of Economy. We talked about the need to increase the number of public-private partnership projects in Ukraine and their provision. Our office can facilitate this. We hope that this agency will have more capacity for feasibility studies andattract investors to Ukraine for cooperation.

Which countries are the most active in investing in Ukraine?

If we talk about real investors who do invest in Ukraine most of all, it is the Netherlands, the UK, Switzerland, Germany, Austria and France.

If you look at the statistics, then Cyprus is the leader. But we have to understand that the ultimate beneficiaries of Cypriot companies are often residents of other countries, including Ukraine. So, it would be an exaggeration to say that Cypriots are the biggest investors in Ukraine.  Some companies just use this jurisdiction to optimise their taxation. In general, Germany leads the way. We have a lot of German enterprises. The German partnership is strategically important for us, their technology and pragmatic approach to building production and supply chains is a model not only for us but probably for the whole world.